Author: Bristlecone Value Partners
Model: Large Cap Value
Disclosure: Long T, MSI, CTAS, NRG, PFE, S, DELL, APOL, MMI, CSCO, WAG
In March, the portfolio’s value was effectively unchanged, matching the S&P 500 index return including dividends. For the first quarter, the portfolio was up about 6.2% versus 5.9% for the S&P 500, again including dividends.
Most sectors went up, with telecommunications leading the way, boosted in part by AT&T’s (NYSE: T) announcement that it was buying T-Mobile. Information technology and financials led the decliners. The portfolio’s top contributors to performance were Motorola Solutions (NYSE: MSI), Cintas (NASDAQ: CTAS), NRG Energy (NYSE: NRG), Pfizer (NYSE: PFE), and Sprint (NYSE: S). The top detractors were Dell (NASDAQ: DELL), Apollo Group (NASDAQ: APOL), Motorola Mobility (NYSE: MMI), Cisco (NASDAQ: CSCO), and Walgreen (NYSE: WAG).
It is always fascinating to us to watch stocks going from top contributors to top detractors (or vice versa) in a month. Yet it seems to occur regularly, demonstrating in the process the risks faced by people who chase short-term performance.
During the month, we did not sell or reduce any investments. We did, however, use some of the cash that had built up to increase the portfolio’s holdings in Sprint and Cisco. We briefly discussed Cisco before, so let’s take a closer look at our investment thesis for Sprint.
There are different types of opportunities for value investors: cyclicals at the bottom of the cycle, fallen angels, spin-offs, etc. At Bristlecone, we make an effort to cast a wide net, and diversify across different areas. Occasionally this includes investing in turnarounds. Sprint definitely fits this category. Although fixing a broken business is difficult, the rewards can be sizable. In other words, investing in a turnaround is typically a high risk – high return potential situation. We try to mitigate the risk by building a position in increments, and keeping an eye on certain metrics to ensure that our turnaround thesis remains sound.
Sprint’s turnaround appears to be gaining traction: after fixing some service issues in the past couple of years, customer growth is finally improving, with the company’s share of new subscribers running higher than in the past few years. Defections and churn are also slowing down. These good results have yet to translate into an improving financial picture, but we feel that the company is headed in the right direction. This being said, Sprint generates enough free cash flow that we’re not too concerned about its high leverage.
Assuming that it goes through in its current form, the recently announced acquisition of T-Mobile is, on balance, a negative development for Sprint. We believe that the odds of the deal being modified or even turned down by regulators are not insignificant. We would also be surprised if it does not prompt other participants to announce deals in the wireless space, potentially providing some kind of downside protection to Sprint’s share price, at least in the short-term.
All in all, we view Sprint as having attractive assets (good spectrum holdings and a large customer base, among others) and the potential for margin improvements going forward. We believe that current management’s efforts to turn the business around are finally bearing fruit. Although we’ll continue to keep an eye on certain operational and financial metrics, we feel that Sprint shares offer an attractive risk vs. reward potential and we felt the time was right to increase our investment.
Sources:
Total return data for the S&P 500 from Standard and Poors: http://www.standardandpoors.com
